Monday, February 11, 2013

Lessons From History: Unlocking the True Value of Standard Oil and Dell

On May 11, 1911, after months of lengthy court proceedings, the Supreme Court of the United States declared that Standard Oil was in violation of federal antitrust laws, and that it was a monopoly. The Court decreed that the company would need to be broken up within the next six months.

John Rockefeller - head of Standard Oil - was not fazed.  Here's what Ron Chernow wrote in his epic book Titan about Rockefeller:

Rockefeller reacted {to the decision} with studied nonchalance.  He was golfing at Pocantico with Father J.P. Lennon from the Tarrytown Catholic church when he learned of the decision, and he did not seem particularly disturbed.  "Father Lennon," he asked, "have you any money?" The priest said no, then asked why.  "Buy Standard Oil, " Rockefeller said - which turned out to be sound advice.

Chernow went on to write why Rockefeller was not concerned by the government's decision:

Those who had seen the Standard Oil dissolution as condign punishment for Rockefeller were in for a sad surprise:  It proved to be the luckiest stroke of his career.  Precisely because he lost the antitrust suit, Rockefeller was converted from a mere millionaire, with an estimated net worth of $300 million in 1911, into something just short of history's first billionaire...

What quickly grew apparent...was that Rockefeller had been extremely conservative in capitalizing Standard Oil and that the split-off companies were chock-full of hidden assets...

For years, the shares of Standard Oil had been depressed by the antitrust litigation, but with the litigation ended, they bounced back to a more normal level....

During the ten years after Standard Oil's 1911 dismantling, the assets of its constituent companies quintupled in value.

Fast forward to a century later.

Michael Dell recently announced that he was leading a group of investors (including Microsoft) trying to take the company he started private.

Is Dell truly undervalued, or is Mr. Dell's move simply a sign that his frustration with Wall Street has gotten too great?

I am inclined to believe that Dell is worth far more than the the bid of $13.50 to $13.75 that Mr. Dell and his consortium are offering. Like Rockefeller, there are parts of the company that Dell knows that the Street is greatly undervaluing. Rather than try to convince investors to change their generally bearish view, taking the company private allows the true value of the company to be unlocked.

Southeastern Asset Management, owner of 147 million shares of Dell, or 8.5% of the company, agrees that Dell is vastly undervalued.

Southeastern has filed suit in an attempt to stop the takeover.  In its lawsuit, the manager laid out what it believed the true value of Dell could be (courtesy of Forbes):

Source: SEC Filing

I don't know if these figures are accurate - after all, Southeastern's investors stand to lose roughly $1 billion if Michael Dell succeeds - but it does illustrate the dangers of betting against the founder of a company.

Just ask John Rockefeller's heirs.